in the 21st Century

18 Kenya’s Financial Transformation in the 21st Century
The chapter shows that the banking sector in Kenya transformed significantly
during this period, with increased depth, stability and access. The chapter also
shows that the composition of the banking sector changed significantly during
this period. The transformation has been led by local large privately owned
banks that have pursued expansionary strategies, including developing products
for small and medium-sized enterprises and a focus on the ‘unbanked’.
However, the chapter highlights that key challenges remain, including (i)
high interest rate spreads; (ii) a decreasing proportion of lending going to key
economic sectors including agriculture and manufacturing; and (iii) slower
transformation of local small privately owned banks.
The chapter is organised as follows. Section 2 provides a historical perspective
on the banking sector in Kenya, summarising the major changes in the banking
sector from 1896 to 2000. Section 3 analyses the changes that took place in
the banking sector as a whole in the period 2000–2012. Section 4 discusses the
changes in the industry composition and focuses on the segmented nature of
the banking sector in Kenya. It also highlights the rise of local large privately
owned banks and their contribution to increased financial access. Section 5
concludes. 2
2 History of the banking sector – 1896 to 2000
2.1 Colonial origins – 1896 to 1950
The establishment of the British Empire in East Africa began with the
establishment of a trading frontier under the agency of the Imperial British
East Africa Company (IBEAC), incorporated in the United Kingdom in 1888.
IBEAC sought to inherit the centuries-old long-distance trade that linked the
African interior to the African coast, and the African coast to the Indian subcontinent
via the Indian Ocean. Colonial rule was formally established with
the declaration of the East African Protectorate in 1895 under the sovereignty
of the Sultan of Zanzibar. Construction of the Uganda Railway (later the East
African Railway) began in 1896 from the East African coast at Mombasa and
reached the point that would become the capital of modern Kenya, Nairobi,
2 The data sources for this chapter are listed in Appendix 1. For aggregate-level indicators, we have used data that
are publicly available from the World Bank website and the Central Bank of Kenya (CBK) website. Data on banks’
financial statements are also publicly available, as banks are required to publish their financial statements quarterly
in the Kenyan press. However, these bank-level data are not available in a database from the CBK website. We have
therefore relied on two companies – Think Business and RSM Ashvir – that collate the publicly available data into
a database and use the data to present annual awards for banks. The dataset was randomly checked against original
bank balance sheets to confirm its veracity.